Whether you are a new parent just starting out, a grandparent who wants to make gifts to a grandchild, or somewhere in between, saving for college is the greatest contribution you can make to the future of your children.
With the costs of college rising as much as 5% per year, the time to start saving and planning is now. For example, the national average cost of a:
- 4-year Public University today is $22,610 per year. In 18 years, that cost might be as much as $60,000 per year, or $240,000 total for 4 years.
- 4-year Private University today is $49,750 per year. In 18 years, that cost might be as much as $160,000 per year, or $640,000 total for 4 years.
Source: Janney College Savings Planner
A 529 Education Savings Plan (529 plan) can be a great way to save for your children or grandchildren’s education. Below are some of the key benefits of a 529 plan.
You pay no taxes on the earnings in a 529 plan account, as long as you use the funds for qualified K-12 education expenses. The growth of your account is free from certain taxes, which may allow your savings to grow more quickly than they would if they were fully taxed every year in a taxable account. This ‘tax-favored’ growth can make a significant difference in the amount you accumulate for college education.
You can contribute up to $15,000 ($30,000 for married couples) per child annually without gift-tax consequences. Under a special election, you can invest up to $75,000 ($150,000 for married couples) per child at one time by accelerating five years’ worth of investments.
Some states allow a tax deduction from (or credit against) state taxes for all or part of your contributions. Please speak with your advisor or tax professional about the potential tax benefit of contributing to a 529 plan.
- The account owner (rather than the beneficiary) maintains control of the account, and determines the amount and timing of distributions.
- You can change the beneficiary to another family member without penalty.
- When plans change, the beneficiary can be changed. If the child receives a scholarship or skips college altogether, the beneficiary can be changed to another child in the same family.
- Most states have no age limit for when the money has to be used.
- There are no income limits. You can contribute regardless of how much you earn.
- You can set up a plan for a child who isn’t born yet. Name another family member or yourself as the beneficiary and change it later (check the details of your state’s plan for age restrictions of the beneficiary).
Choosing a 529 Plan
There are more than 100 plans across the country to choose from. Your Financial Advisor can help you select the best 529 plan for you and your family. There are different investment programs in every state, and most 529 plans have no state residency requirements. Check to see if your own state offers tax benefits for investing in their savings plan.
Many 529 plans offer age-based funds, which are predetermined mixes of investments designed to automatically rebalance to reduce risk, and become more liquid as the child gets closer to attending college.
You can also work with your Janney Advisor to create a customized plan.
How Much to Initially Invest
Have a lot of money to put away? Take advantage of the five-year acceleration option and invest $70,000 ($140,000 for married couples) at one time.
Have a little to put away? Start small, but start now. With time on your side, you can take advantage of growth and the magic of compounding. Continue to increase your contributions over time.
The Fine Print: A Few Things to Note about 529 Plans
- Account distributions are tax-free if used for qualified higher education expenses—which include tuition, room and board, fees, books, supplies, and equipment (including computers).
- If you withdraw money from your 529 plan account for purposes other than higher education, your earnings will be subject to federal income tax and possibly a 10% federal tax penalty.
- Your 529 plan holdings could impact your beneficiary’s ability to qualify for student loans and grants. Ask your Financial Advisor for details.
Your Janney Financial Advisor can help choose the right plan and investment choices for you and your family’s needs.
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